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AI technologies have long-term societal implications that impact youth, prompting a need for critical AI literacy for students. While current K-12 AI curricula have increasingly integrated societal impact and ethics concepts in AI curricula, there is a need to center youth’s agency in decision-making around AI systems that impact them. In this work, we engaged 94 middle and high school art students in a Policy Design learning activity as a part of an Art and AI learning workshop. Students worked in groups to create policies around AI's use in art, considering stakeholders like artists, AI companies, and consumers. Findings revealed that students developed nuanced, actionable policies that reflected a deep understanding of AI's impact on the art ecosystem, including issues of copyright, artist compensation, and transparency. The activity empowered students to think critically about AI’s ethical implications on various systems in the AI and art ecosystem and fostered a sense of agency in shaping its future. This work demonstrates the value of integrating policy design into K-12 AI curricula, providing youth with the skills and perspectives to become informed, ethical citizens in an AI-driven world.